Non Sequiturs on Parade – PART VIII

This is the next to last post about Steve Roth’s handy compilation of leftist bromides, non sequiturs, self-congratulations, and just plain ol’ errors, “Why Welfare and Redistribution Saves Capitalism from Itself.”[i] The issue this series is addressing is: Did Roth’s reference to the Great Depression help explain why welfare and redistribution saves capitalism from itself? (Discussions of other instructive aspects of the article can be found in PART I, PART II, PART III, PART IV, PART V, PART VI, and PART VII.)

As his final effort to explain why “massive redistribution . . . saves capitalism. . .” (before waxing eloquent about the goodness of “massive redistribution”—something irrelevant to proving his claim), Roth recounts an infamous leftist myth:

“Or to put it another way, and bring it right home to America: The New Deal saved capitalism from itself. . . The New Deal showed that capitalist countries could overcome the “concentration” curse. Using a host of government programs, it resurrected the mighty American market engine from the depths of The Great Depression. . . .

How did that happen? The New Deal shared the wealth in manifold and diverse manners, using a plethora of government programs, rules, and institutions.”

Roth’s story is a myth – that is, “a traditional story, especially one concerning the early history of a people or explaining some natural or social phenomenon, and typically involving supernatural beings or events.” The supernatural hero of this historical story is FDR. “Roosevelt’s combination of confidence, optimism and political savvy – all of which came together in the experimental economic and social programs of the ‘New Deal’ – helped bring about the beginnings of a national recovery.”[ii] With his trusty pen, gift for fireside gab, intelligence, patrician can-do spirit, and faith in government and its experts, FDR banished Hooverism (“do-nothingism”) from the land and brought prosperity to the land.

Part of this story is a myth of the “widely held but false belief or idea” kind; i.e., it is epically incorrect. Hoover was a life-long advocate of active involvement by the government in the economy.

“Pulitzer-Prize winning historian David Kennedy summarized Hoover’s work in the 1920-21 recession this way: ‘No previous administration had moved so purposefully and so creatively in the face of an economic downturn. Hoover had definitively made the point that government should not stand by idly when confronted with economic difficulty.’[iii] (Harding, and later Coolidge, rejected most of Hoover’s ideas. This may well explain why the 1920-21 recession, as steep as it was, was fairly short, lasting 18 months.)”[iv]

Unlike Harding and Coolidge in 1920-21, Hoover did not stand idly by after the 1929 stock market crash.

“In fact, Hoover had long been a critic of laissez faire. As president, he doubled federal spending in real terms in four years. He also used government to prop up wages, restricted immigration, signed the Smoot-Hawley tariff, raised taxes, and created the Reconstruction Finance Corporation—all interventionist measures and not laissez faire. Unlike many Democrats today, President Franklin D. Roosevelt’s advisers knew that Hoover had started the New Deal. One of them wrote, ‘When we all burst into Washington . . . we found every essential idea [of the New Deal] enacted in the 100-day Congress in the Hoover administration itself.’”[v]

Nevertheless, using the word “myth” with respect to the plausibly true aspects of the FDR’s New Deal saved the day story is somewhat of an overstatement. History, especially economic history, is subject to selection and interpretations of the facts that historians choose to emphasize or ignore in order to reach (usually preconceived and desired) conclusions. Certainly, a story weaving together factoids about what happened before, during, and after the Great Depression coupled with enough wishful thinking can be spun into a plausible history that appears to support Roth’s claim. Had Roth wanted to cite scholarly support for his interpretation (“myth”), he had an abundance of scholarly work from which to choose. (By “scholarly” I’m referring to work done by people who are legitimately considered to be scholars. Inasmuch as a scholar’s job includes disproving faulty work of other scholars, saying that a work is scholarly says nothing about whether the work is objective or true.) Much FDR hero worship is of recent vintage (that is to say, since the near universal rejection by economists in the 1970s of the Keynesian myth).[vi] There is also, however, an abundance of scholarly work that takes great exception to or outright rejects Roth’s narrative about the Great Depression. This includes the work of at least four Nobel laureate[vii] economists.[viii] The proper question for the critical thinker is, “Which version of history is the most credible?”

It should be noted in passing that, although it could never be proved, there may be some merit in the argument that FDR’s actions “saved America from socialism,”[ix] i.e., that FDR may have saved America from a revolution that would have resulted in outright socialism. That claim, however, would not have supported his thesis.[x] And neither does Roth make an argument similar to the one made by GWB when he said, “I’ve abandoned free market principles to save the free market system.” Bush thought that he was enabling capitalism to flourish later. Roth espouses a permanent abandonment of the free market principles as massively as possible without killing capitalism.

Let’s continue exploring Roth’s interpretation of New Deal history.

I suspect that everyone reading this has heard the New Deal “history” to which Roth referred. That story is told in the textbooks of schools and universities that are either part of the government or supported by and in symbiotic relationships with the government. Because those institutions comprise the vast majority of schools, essentially all textbooks tell that superficially plausible tale.

I also suspect that, unless you are particularly interested in history and economics, you have not heard much, if any, of why you should either doubt or reject that interpretation. Which interpretation is the more compelling interpretation?

After the stock market crash of 1929, a stark battle among scholars ensued as to what the government should do. The leading antagonists were John Maynard Keynes and Frederick Hayek.[xi] Keynes supported massive government spending and greater government involvement in and control over the economy. “Keynesianism” was opposed by many economists at the time and since. Keynes never became a Nobel laureate, but Hayek did. In addition to the four Nobel laureates mentioned above, many economists[xii] take great exception to or reject outright much of Keynesianism. After 50 years of studying the Great Depression, Keynesianism had been “fully discredited”[xiii] by the 1980s. (Why it has come back from the grave will be the topic of the next, possibly last, post on Roth’s article.)

It must be acknowledged that at least one Nobel laureate economist, Paul Krugman, disagrees with Friedman’s interpretation of the Great Depression history. In particular, Krugman claims Friedman is confused about the Great Depression[xiv]—while other scholars claim Krugman’s analysis is flawed.[xv] (For what it is worth, I believe that Krugman is a formerly great economist who is now willing to trade sound economics for fame and being part of the in crowd—and he possibly has some more worthy goals, e.g., placating the mob he believes will tear the whole thing down without massive redistribution. I’m not alone in believing Krugman’s punditry is not good economics.[xvi]) The thing to be noted, here, is that “the experts” do not agree about the supposed “lessons learned” from the Great Depression history.

As discussed in PART VII, Roth’s perpetual “massive redistribution” is not supported by Keynesianism—the ideas underlying the New Deal. Krugman puts it this way: “Although Keynes was by no means a leftist—he came to save capitalism, not to bury it—his theory said that free markets could not be counted on to provide full employment, creating a new rationale for large-scale government intervention in the economy.”[xvii] Keynes’s prescription was to medicate capitalism so that it could thrive when the economy was strong enough to let it; Roth’s prescription is to massively suck the life blood out of the body whenever possible.

Roth’s claim that perpetual “massive” spending saves capitalism from itself was also clearly rejected by Henry Morgenthau, FDR’s Treasury Secretary. After eight years of FDR’s attempts to pull the country out of its economic depression with spending, Morgenthau said in 1939:

“We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and if I am wrong . . . somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises. . . . I say after eight years of this Administration we have just as much unemployment as when we started. . . . And an enormous debt to boot.”

In other words, the guy closest to FDR’s spending said that Roth’s citing of the Great Depression as support for his faith in spending is ill-founded.

We also know that, since 1880, the U.S. has experienced 27[xviii] economic panics and recessions, one of which was the “Great Recession” (starting in 2007) and one “Great Depression”[xix] (1929-1938). By my count, the Great Depression lasted 107 months, and the Great Recession 18 months (and by many people’s reckoning, about 10 years). Both of those events were accompanied by massive government involvement in the economy prior to and, at least in part, inducing the crash as well as massive efforts to fix the problem after the crash. Neither went well.

By contrast, the average recovery time for the other panics and recessions since 1980 is just over 14 months. Government efforts to fix the economic problems of those events were relatively much smaller. The recession following the much more massive crash of 1920 (caused primarily by soldiers not being able to find jobs when they returned from WWI) lasted only 18 months. Both believing in free markets, Presidents Harding and Coolidge did essentially nothing to turn the economy around—and kick-started the “Roaring Twenties.” (While Coolidge’s parsimonious fiscal policies facilitated healthy organic economic growth, the fairly young Federal Reserve, thinking its experts had things figured out, flooded the economy with currency that created bubbles that burst with the crash of 1929.[xx])

What is usually left out of the FDR story is that government “doing something” automatically has negative consequences and that the more things it does, the greater the negative consequences are. FDR infamously said, “It is common sense to take a method and try it. If it fails, admit it frankly and try another. But above all, try something.” On the surface, that comment makes sense. On the other hand, consider this comment from the perspective of a business executive. To launch a new venture or product, an executive must attempt to predict the future demand for it, cost of raw materials, labor, taxes, regulations. . . The more predictable the future is, the lower the risk of investing in the project and the higher probability capital can be raised to proceed. This is a difficult task when the government and the economy is relatively stable. It becomes near impossible when government is constantly failing and trying new “somethings.” “Regime Uncertainty”[xxi] always suppresses investment and growth. The more government activity there is, the more uncertainty. So, for a government’s “something” (much less, many “somethings” at once) to be net positive, its positive consequences must be greater than its negative consequences. When the government is messing with the economy, that becomes almost impossible to achieve. (And with many things being tried at once, it becomes nearly impossible for economists to figure out what worked and what didn’t.)

Macroeconomics (the “branch of the economics field that studies how the aggregate economy behaves”) is a wonderful science, chock full of fantastic insights. What economists know and theorize is astoundingly interesting and complex and often very useful in identifying what not to do. It is especially wonderful in conjuring theories as to what might be true and what might make things better. On the other hand, the sad truth is that truly understanding how the economy works and how to predict, prevent, or cure economic booms and busts is still beyond the grasp of humans—and may always be. The Great Moderation (1980-2007) indicated that humans are making progress in understanding some things about the economy, but the events leading up to the crash of 2007 indicate that humans are far from knowing enough to avoid economic disasters (and/or that humans cannot help themselves from making bad collective decisions when they do or could know better). Paul Romer, the Chief Economist and Senior Vice President of the World Bank, describes the current state of macroeconomics as “a math-obsessed pseudoscience.”[xxii]

We must realize, however, that even if economists did know exactly what the government should do, the government would neither follow the plan nor flawlessly implement it. No legislation relating to the economy is free of crony provisions (siphoning) to fund politicians’ campaign coffers or burnish politicians’ popularity back home and bureaucratic implementation and enforcement—mostly by self-interested, minimally motivated, and marginally competent administrators in one or multiple bloated agencies. What comes out the back end of this process usually bears only a vague resemblance to the economically advised plan—but it will have a title that sounds really good to a majority of voters (who know or understand only a tiny fraction of what the economists advised; Jonathan Gruber comes to mind).

We need not despair, however. As history has shown, economies recover whether or not the government “does something” in an attempt to fix a recession, though much of what the government has done made things worse than they needed to be. That is to say, for whatever reason, things tend to get better faster when governments do the precise opposite of what Roth suggests should be done, i.e., what FDR did.

By and large, the public is ignorant of the counterarguments and facts that reveal the extremely shaky ground on which Roth stands. That an uneducated public sees Roth as standing on terra firma when making fanciful claims about history is a testament to how our government institutions, especially our educational institutions, are failing the citizenry. Why that is the case will be addressed in the next part of this series and hopefully will add to the reasons to doubt Roth’s interpretation of history.


[i] If you haven’t already done so, please read the article, but please also suspend any belief that it makes a lick of sense until you’ve read my several posts about the article.

[ii]FDR: The President Who Made America Into a Superpower.”

[iii] David M. Kennedy, Freedom From Fear: The American People in Depression and War, 1929-1945. New York: Oxford University Press, p. 48.

[iv]Hoover’s Economic Policies.”

[v]Herbert Hoover: Father of the New Deal

[vi] “When the initial expenditures failed to eliminate unemployment and were followed by a sharp economic contraction in 1937-38, the theory of “secular stagnation” developed to justify a permanently high level of government spending. The economy had become mature, it was argued. Opportunities for investment had been largely exploited and no substantial new opportunities were likely to arise. Yet individuals would still want to save. Hence, it was essential for government to spend and run a perpetual deficit. The securities issued to finance the deficit would provide individuals with a way to accumulate savings while the government expenditures provided employment. This view has been thoroughly discredited by theoretical analysis and even more by actual experience, including the emergence of wholly new lines for private investment not dreamed of by the secular stagnationists.” Milton Friedman, Page 67 of “Capitalism and Freedom.” (If you find my writing interesting, you would be hard-pressed to find a more interesting book than “Capitalism and Freedom.”)

See also Paul Krugman’s confirmation that Keynesianism had been discredited (“fell into disfavor”) among economists. “And this had a somewhat perverse effect. The rise of Keynesian economics also meant the rise of the equations guys (Samuelson in particular), and in the end the equations crowded out institutional economics even as Keynes fell into disfavor.” [Emphasis added.]

See also Christina Romer (an economist who believes the multiplier of “stimulus spending” is greater than 1—she’s a leftist who supports high levels of government involvement in the economy), who warned policymakers to learn “The lessons of 1937.” While I believe some of the lessons she learned from 1937 just ain’t so, she concluded (relying heavily on Milton Friedman and Anna Schwartz) that the federal government made two large mistakes in 1937 that extended the depression—i.e., that the government action hurt more than it helped.

Robert Lucas and Thomas Sargent referred to “the spectacular failure of the Keynesian models in the 1970s.”

[vii] This is not to suggest the Nobel committee always make sound judgments. The Nobel committee (like all committees, institutions, and governments) is comprised of fallible humans. It is only to suggest that the views I am urging are not from tinfoil hat rabble rousers.

[viii] Friedrich August Hayek (“Road to Serfdom”), Milton Friedman (see endnote vi), Vernon Smith (“Now, everyone believes we got out of the Great Depression because of Second-World-War spending. That’s the common explanation. And many economists have studied the effect of deficit financing on the recovery, but it’s basically ineffective”), and James Buchanan (“…by employing deficit spending and increased state intervention President Obama will ultimately hamper the long-term growth potential of the US economy and may risk delaying full economic recovery by several years”) clearly believed that the statement that “FDR saved the economy” with spending and involvement in the economy is false.

Although I did not find a discussion of George Stigler’s views about the history of the Great Depression, he “published ‘The Theory of Economic Regulation,’ in which he argued that regulation generally arises from the self-interested political activity of organizations that desire to be regulated. That seminal essay triggered a major research program in the economics of regulation.” Based on this statement alone, one could reasonably conclude that he did not believe FDR was the hero of any story.

While I have not found anything directly on point with respect to Gary Becker (a friend, colleague, and coauthor with Friedman) or Thomas Sargent (known for his “rational expectations”—a virtual impossibility when government is constantly changing the rules and imposing new policies as FDR did), there is good reason, based on what I have found, to believe that they do not buy into the argument that Keynesian economics saved the day during the Great Depression.

[ix]Discovery – A Memoir” by Vernon Smith

[x] “Saving the country from socialism” should not be confused with the possibility that what FDR did was economically advantageous. To illustrate, assume that the Fed, Hoover, and FDR policies were economically disadvantageous (e.g., turned what would have been a run-of-the-mill recession following a bust into the Great Depression—which I, and many people who are wiser and more learned than me, believe was the case), but were necessary to subdue the collectivist belief of the vast majority of the economically illiterate public that the governments must “do something” (to put down a revolt). In other words, assume that the New Deal suppressed growth in everyone’s standard of living, but also prevented a revolution. That the New Deal policies saved the country from succumbing to even worse policies that the mob would have imposed does not support Roth’s suggestion that massive redistribution improves the economy.

[xi]Fear the Boom and Bust: Keynes vs. Hayek Rap Battle

[xii] Thomas Sowell, Walter Williams, Robert P. Murphy, Robert Higgs, Stephen Davies, Alex Tabarrok, and Michael Munger.

Mike Munger’s comments in an interview on the subject are particularly compelling:

FRANK STASIO: If the government stimulates the economy though, through spending programs, doesn’t that create, doesn’t that generate wealth, doesn’t that generate money that can be circulated through the system and then ultimately strengthen the economy?

MICHAEL MUNGER: “The problem with that reasoning, and it could be true, but it just isn’t necessarily true. The problem with that reasoning is something that I’ve called, I’ve said that US Policy is daft, and what I mean by daft is that deficits are future taxes, and so what we see is that government spending that is deficit financed. We’re taking money, either from current tax payers, or worse from future tax payers who have no voice in it, and we’re spending it. The question is what are we spending it on? Well, if we are spending it on current services so that we are not actually paying for the amount of services that we’re getting, that’s not going to create growth, that’s not going to create jobs. All it is, is a drag on future generations. What we are not doing is spending it on infrastructures, railroads, education. If we were doing those things then yes, perhaps it would create jobs over the long term.”

[xiii] See endnote vi.

[xiv]Who Was Milton Friedman?”

[xv]Did Krugman Catch a Contradiction in Friedman’s Great Depression Work?

[xvi] Richard Posner (someone with whom I disagree on many things) says this of Krugman: “It really demeans the profession. Krugman is obviously a good economist. He’s got this book, “The Return of Depression Economics.” It’s very good… But his column for The New York Times is really irresponsible, nasty. Sometimes on his blog he makes accusations. In one of his columns, he suggested that conservatives were traitorous. He used the word “treason.” I’m bothered by that. If you have a very politicized academic profession, you lose your confidence in their objectivity.”

[xvii]Who Was Milton Friedman?”

[xviii]List of recessions in the United States

[xix] Some, including the current Wikipedia page (see endnote xviii), claim that the economic crash of 1920 was a “depression.” The decline in employment and the GDP was certainly much greater than during the Great Depression. Myself and others, however, classify it as a “recession” because of its short (18 month) duration and the extended boom (the “Roaring Twenties”) that followed (which contrasts sharply with the Great Depression and the Great Recession).

Some, including the current Wikipedia page, say that the Great Depression lasted from 1929 until 1933, followed by a recession in 1937-38. Others, including me, say it lasted about 10 years, starting in 1929. The Wikipedia page also says that the Great Recession lasted only 18 months. While I have accepted that, many people who lived through it are still feeling its lasting effects, and growth has been languid so far.

[xx]What Caused The Great Depression? | Lawrence W. Reed and Stefan Molyneux

[xxi]Regime Uncertainty—Why the Great Depression Lasted So Long and Why Prosperity Resumed after the War.”

[xxii]World Bank’s chief economist Romer says macroeconomics in trouble.”

More On Two Paths for America

Author’s Note: A year ago today in the midst of the presidential campaign,[i] I posted the comment below on Facebook. I’m reposting it (with slight edits and insertions of citations) here because it extends my remarks in an earlier blog post, “Two Paths for America,” and it is relevant to the discussion of Steve Roth’s article. Though I did not specifically mention it in last year’s post, “massive redistribution” is part and parcel of “Option B” as described below. As will become obvious, I believe “Option A” is more beneficial to the poor than “Option B” (Despite the fact that while Option A will make them wealthier than Option B, it will not necessarily make the poor happier. (See “Wealth Creation. No Happiness, Why Bother?”)

Which would you choose if you had the following choices?

  1. The purchasing power of the bottom 75% of American households increases by 20% – 40% over the next ten years, but the purchasing power of the top 25% of American households increases by 30% – 50% over that period; or
  2. The purchasing power of the bottom 75% of American households decreases by 0% – 10% over the next ten years, but the purchasing power of the top 25% of American households decreases by 20% or more over that period?

Economic policies Americans demand their politicians adopt will head the country either more toward Option A or toward Option B. The exact numbers are impossible to predict but the above alternatives fairly illustrate the different effects between policies of free markets, light regulation and light taxation (Option A) and policies of trade barriers and other crony capitalism, heavy regulations and “soak the rich” policies (Option B).

Politicians and their symbiotic companions in academia want Americans to believe that income inequality is the ultimate bad outcome (did you ever wonder why the average inflation adjusted incomes of private university professors are $21,000 more today than they were in 1985? Are the students really getting a 30% higher quality of education today than they were in 1985? Surely the salaries of professors who are called upon by politicians to support what the politicians want to do have far outpaced the salaries of average professors). While it is true income inequality produces some negative consequences, it is also true that income inequality is the outcome of policies and processes that produce the greatest gains for the poor and middle income people over time.[ii] Politicians want Americans to believe Option B is the best approach so they can gain more power (via new laws, regulations, and selective enforcement), dispense more favors to friends (crony capitalism – which makes some people rich, thereby giving those rich people the funds and motivation to fill politicians’ campaign coffers – Solyndra anyone?)[iii] and spend more money (more tax revenue). The fact Option B slows the improvement in the standards of living of lower and middle income people is a price politicians are willing to impose on others in order to gain the benefits to them of Option B.

For the sake of brevity, I will spare you the details here, but the simple, but apparently not obvious, reality is that income inequality is the engine of prosperity. The greater the inequality, the higher the horsepower of the engine, i.e., the faster the acceleration of prosperity. Of course, the engine will not operate properly unless certain other conditions exist (Deirdre McCloskey’s works in this area are excellent).[iv] But the primary reason people get out of bed, go to work and be creative and productive is that the rewards for doing so improves the prospects for them and their families of having a better life than if they were to stay in bed. In general, the greater the rewards from working, the more people will work. [A serendipitous benefit of more work is that work is the process of a person voluntarily doing something to serve the wants and/or needs of others.]

Don’t believe me that the poor and low income people are helped the most? Compare the quantity and quality of what poor and low income people consume today compared to what they consumed in 1916 when there were only a handful of billionaires (if the wealth they had were converted to today’s dollars). The fact that the poorest American can walk into any hospital and get medical care that actually heals is a lifesaving difference for millions. That most of our poor are housed, overweight, air conditioned, astoundingly entertained by cable TV and unlimited access to knowledge and the world through the computers at the library (if not at home) are also tell-tale signs of how the consumption by the poor has improved vastly over time. Look also at the vastly greater amount and percentage of taxes paid by the top 10% today than then. Much of those tax dollars go to poverty programs. The lives of the wealthy have improved vastly also,[v] but middle and some lower income people now travel in the same kind of planes as all but the extremely top income people do and arrive at the destination only a few seconds later. In 1916, all but the very rich pretty much stayed in their village.

Option B has been BHO’s general approach to economic policies. He claims he sacrifices growth as a matter of fairness.[vi] We are experiencing the second slowest recovery from a recession ever as a result. [The slowest recovery ever was during the great depression when Hoover and FDR implemented Option B even more vigorously than BHO has.] Sadly, Option B will likely be America’s policy choice going forward because it is the general approach espoused by both Hillary and Trump. Hillary espouses Option B pretty much exclusively, and some of Trump’s policies are more in line with Option A, but some of his policies are full blown Option B.

Gary Johnson’s policies are almost exclusively Option A.


[i] The Facebook post was elaborating on other Facebook posts urging people to vote for the flawed Gary Johnson because his policies were less flawed than those of Trump and Hillary.

[ii] See “Income Inequality Is More Than It is Cracked Up to Be.”

[iii] Consider also what happened under the TARP bailouts of Wall Street banks.

Matt Taibbi wrote a very readable summary, “Secrets and Lies of the Bailout” for Rolling Stone. “The extent of this “secret bailout” didn’t come out until November 2011, when Bloomberg Markets, which went to court to win the right to publish the data, detailed how the country’s biggest firms secretly received trillions in near-free money throughout the crisis. . . . ‘These megabanks still receive subsidies in the sense that they can borrow on the capital markets at a discount rate of 50 or 70 points [compared to smaller banks] because of the implicit view that these banks are Too Big to Fail,” says Sen. Brown.’ . . . All the big banks have paid back their TARP loans, while more than 300 smaller firms are still struggling to repay their bailout debts.”

The upshot is this: With TARP and Dodd Frank, the “too big to fail” banks received trillions of dollars of benefits from the government, became larger, and not only did the banks take no “haircuts” and get money at far below market rates, their officers and directors were not fired or otherwise required to share in the cost of all the damage their risky behavior inflicted on the country, but rather they were paid huge bonuses. All of this confirms to those bankers that the government will allow them to take huge risks and collect huge rewards of if the risks pay off and bear no negative consequences if the risks result in failure.

Another consequence is Wall Street is the source of a very noticeable percentage of political campaign contributions. See, “Wall Street Spent $2 Billion Trying to Influence the 2016 Election.” There are, of course, the Wall Street speaking fees (Obama, Hillary and Bill Clinton) and contributions to the Clinton Foundation—as if those were the only ways money was funneled to the politically powerful. (Bill Clinton did not fly exclusively on the jet he owns.)

[iv] An example: “2017 Hayek Lecture | Manhattan Institute

[v] But not as much as one might assume, see, “Income Inequality — the Gap Is Not as Large as You May Think.”

[vi] See, “Obama: Let’s Raise Capital Gains Tax Even if Less Revenue- Fairness – You might be a Leftist…

Non Sequiturs on Parade – PART VII

Let’s start winding up the analysis Steve Roth’s handy compilation of leftist bromides, non-sequiturs, self-congratulations, and just plain ol’ errors, “Why Welfare and Redistribution Saves Capitalism from Itself.”[i] The issue this series is addressing is: Did Roth explain why welfare and redistribution saves capitalism from itself? (Discussions of other instructive aspects of the article can be found in PART I, PART II, PART III, PART IV, PART V, and PART VI.)

As discussed in the previous parts of this series, the first third or so of Roth’s article did not attempt to explain “Why Welfare and Redistribution Saves Capitalism from Itself.” The attempt to do that began in the ninth paragraph of his article with:

“Then add an Econ 101 notion that is pretty much universally accepted, because it’s strongly supported by theory, empirics, and just plain sensible intuition: decreasing marginal propensity to spend. A poorer person is more likely to spend an extra dollar (in wealth or income) than a richer person. Because: the “utility” (or just benefit) purchased by that extra dollar is so much higher for the poorer person. The fourth ice cream cone, iPhone, or Lamborghini just isn’t as enjoyable as the first. So greater concentration into a few hands means less spending — in economic terms, lower “velocity,” or turnover, of wealth.”

Roth’s claim that an extra dollar is more valuable to a poor person than to a rich person is correct.[ii] It is also very likely true that if a massive amount of dollars were given to poor people, they would spend it more quickly than the money would be spent if it stayed in the pockets of the rich from whom it was taken. This is largely due to the fact that wealthier people tend to save/invest more of their income than poor people do. From these two factoids, Roth asserts a conclusion: “So greater concentration into a few hands means less spending — in economic terms, lower “velocity,” or turnover, of wealth.”

Eureka? What is “velocity of wealth?” And who ever said it was a good thing?

Starting a paragraph referring to Econ 101 and ending it with “in economic terms, lower ‘velocity,’ or turnover, of wealth” [emphasis added] is playing fast and loose with the facts. I Googled “velocity of wealth” and got only three pages of results—none of which were links to academic papers and one of which was another article by Roth. It is certainly not a topic addressed in Econ 101. “Velocity of money”[iii] (and money is not wealth[iv]) is a common term used in economics. (If you Google “velocity of money,” you could spend years reading the academic papers and articles on that subject.) Velocity of money is important and might be mentioned in Econ 101, but it is typically discussed in more advanced courses on money supply and monetary policy. By citing Econ 101 and “velocity of wealth” in the same paragraph, Roth appears to be trying to lend a patina of sophistication to an unsubstantiated and perhaps made up concept. His appeal to “sensible intuition” is comical. A main purpose of economics is to dispel people of the foolish intuitions held by those who have neither an education in economics nor an “Economic Way of Thinking,” but believe their intuitions to be sensible.

To the extent that the velocity of money reflects a high level of trading (the realization of the wealth each party has created), a higher velocity of money is good. Do not be fooled, however, into believing that this fact means that a higher “velocity of wealth” going from the rich to the poor via force is a reflection of an economy working well. The fact that such velocity might effectively alleviate hardships might be good for the economies of the recipients or the souls of those who favor it proves nothing about its economic effectiveness overall—and Roth is attempting an economic argument.

In general, compared to voluntary wealth transfers, forcibly moving wealth from the rich to the poor tends to 1) enable the poor to consume more than they otherwise would—in the short run, 2) enable producers to sell more of their goods and services—presumably making more profit—in the short run, 3) reduce the incentives to produce wealth—so long as it persists, and 4) lessen the amount of research, discoveries, innovation, development, and production of new and better things. (Innovation delayed is innovation denied to those who die before the innovation is made.) Roth attempts to focus the reader on the short-run effects of wealth transfers and ignores both the current damage to the poor caused thereby and the long-term negative effects of wealth transfers on everyone—especially the long-term damage that wealth transfers do to the psyches and standard of living of the poor in the long run.[v]

There is much that is positive to be said for money moving from the rich to the poor, especially when done voluntarily (or by the inadvertent and unavoidable free flow of gushes of wealth from innovators and wealthy people to the poor[vi]—which some people call “trickle down”[vii]). (The poor in America have gone from being approximately equal to the poor everywhere in the world as of America’s founding to being in the top 1% or 2% of the wealthiest humans who have ever lived, and extremely little of that progress is attributable to anything done by the poor.) Good cases for taking from the rich and giving to the poor can be made based on caring and empathy. Note that Roth’s paragraph quoted above is not making that case. He is trying to make an economic case for taking from the rich and giving to the poor. Let’s sort out whether that paragraph gets the job done.

After the Econ 101 fiasco, Roth launches into a series of paragraphs that try to string together syllogisms to reach the conclusion that taking money from rich people and giving it to poor people is good for the economy. Roth’s theory is something like this: 1) Producers need people to spend money to buy their products, and 2) rich people do not spend as high a percentage of their cash on hand as poor people; therefore, taking from non-spenders and giving it to spenders prevents capitalist economies from “strangling” themselves due to people being insufficiently willing or able to buy enough. If such were the case, then one would have to conclude that the more massive the forced redistribution, the better off a country would be. (Roth neither suggests there is any limit of “massive distribution” beyond which things would get worse, nor that there even is such a limit.)

The argument has a strong Keynesian odor, but Roth seems not to realize that John Maynard Keynes[viii] prescribed government spending only in certain very specific circumstances that occur only occasionally. In simple terms, he theorized the existence of a vicious cycle in which: 1) “animal spirits”[ix] occasionally cause too many people to lose confidence in the economy, 2) when there is too little confidence, people slow their rates of spending, 3) when rates of spending slow, people lose their jobs, and 4) confidence in the economy lessens when many people are losing their jobs. Repeat. For the most part, however, Keynes was not talking about Roth’s “massive welfare redistribution”—which would take place all of the time and in ever-increasing amounts. On the contrary, Keynes theorized that government could break the vicious cycle by “priming the pump” of job creation with government-made work projects. The idea was to increase confidence in the economy by putting people back to work so as to change the spirits of the animals. People could get money from the rich transferred to them, but they had to work for it.[x] People getting money to enable them to stay at home and consume was no part of the theory. Keynesian theories do not support Roth’s claim that “massive redistribution” to people who produce insignificant wealth or none at all even works, much less that it “saves capitalism from itself.” (Keynes would surely reject Roth’s claim.)

Did some other giant among economists come up with a different theory to support the idea that “massive redistribution” equals “economic prosperity?” Not that I am aware of. (I’d be happy for someone to identify such a giant.) Roth may have come up with this idea on his own with a little “help” from the “Modern Monetary Theorists.”

Is there a good reason to believe that this perpetual motion theory would work? First, note that very little money in the U.S. economy is currency under mattresses. Rich people tend to invest what they do not spend, and how much they spend is influenced greatly by their anticipation of future income from such investments. Those investments fund the businesses that are creating the country’s jobs and wealth. (The people with those jobs are earning money to spend and are paying taxes that keep the government activities, including redistribution, funded.) And, of course, the rich spend a lot of money—i.e., they are the source of much of the spending (“saving”) Roth says is so essential for capitalism not to strangle itself. Taking money from the rich will, therefore, result in 1) either less spending by the rich, less investment by the rich, or both, 2) fewer jobs (less spending) than would otherwise be the case due to a lower level of investment in the country’s businesses, and 3) spreading the money available to be redistributed over more people (because there are fewer jobs/more people out of work when investments in businesses are sold off to pay taxes for redistribution). (It also slows the invention of new tools that enable people to be more productive—i.e., valuable—and get paid more.)

For a perpetual motion machine to have a chance of working, it must produce more energy than it consumes. Roth offers nothing to support the idea that the wealth created by moving money from the rich who value it less to the poor who value it more comes close to offsetting the clearly identifiable losses to the economy such transfers would cause. The Modern Monetary Theorists theorize that governments can spend as much as they want without causing any problems. Not even a formerly great economist turned fashionable pundit who is a lionized leftist, Paul Krugman, believes this nonsense.[xi]

Roth then makes a claim that appears to be supported by nothing more than his keystrokes:

“Absent the redistribution and government programs that rich countries provide, market capitalism strangles itself, through concentration, with insufficient demand to drive — to “incentivize” — its own masterful engine of production. Absent those programs, countries never make it into the the [sic] rich-country club.”

How can this be squared with the fact that the American and European economies boomed throughout the Industrial Revolution of the 19th century—a period during which there was no massive redistribution by national governments? Somehow, “the masterful engine of production” roared on (the opposite of “strangling itself”) without government “incentivized” demand. The incentive to buy was enough to create vast amounts of innovation, production, and wealth, while the standards of living grew more rapidly than ever before. In short, “The Industrial Revolution marked a major turning point in history. During this period, the average income and population began to exhibit unprecedented, sustained growth.” Standards of living of the poor rose also in this period. A case can be made that it is no coincidence that upper class people in Great Britain and elsewhere, having discovered that, with free market economies, the upper classes could prosper economically without maintaining the institution slavery, started the long process of making slavery illegal almost everywhere.

Roth then tries to prop up his so far fanciful claims by resorting to the history of the Great Depression. The weakness of that attempted support of his claim will be discussed in the next post.


[i] If you haven’t already done so, please read the article, but please also suspend any belief that it makes a lick of sense until you’ve read my several posts about the article.

[ii] I made the same point in “Income Inequality — the Gap Is Not as Large as You May Think.”

[iii] “The velocity of money is the rate at which money is exchanged from one transaction to another and how much a unit of currency is used in a given period of time.”

[iv]Money Is Not Wealth — But It Helps Create Wealth

[v] See “Solutions” for a discussion of many ways that government actions kill people.

[vi] “The economist William Nordhaus has calculated that the inventors and entrepreneurs nowadays earn in profit only 2 percent of the social value of their inventions. If you are Sam Walton the 2 percent gives you personally a great deal of money from introducing bar codes into stocking of supermarket shelves. But 98 percent at the cost of 2 percent is nonetheless a pretty good deal for the rest of us.” “How Piketty Misses the Point” by Deirdre N. McCloskey

[vii] For more on this, see “Two Paths for America.”

[viii] John Maynard Keynes came up with the theories upon which FDR relied as he extended Hoover’s policies that turned the crash of 1929 into the Great Depression. (Some people do claim that because Keynes was not an advisor to FDR, FDR “was not heavily influenced by Keynes.” Nevertheless, Keynes was the key figure lending economic credence to the economic policies that FDR employed. Keynes gave FDR plausible theories with which to combat the barrage of highly credible opposition to his policies from Friedrich Hayek and others.

[ix]Animal Spirits

[x] Keynes: “The government should pay people to dig holes in the ground and then fill them up.” People would reply, “That’s stupid, why not pay people to build roads and schools.” Keynes would respond saying “Fine, pay them to build schools. The point is it doesn’t matter what they do as long as the government is creating jobs” [emphasis added]

[xi]The Conscience of a Liberal” by Paul Krugman